The markets drifted higher this week despite the government shutdown ending its third week with no resolution in sight. What gave investors a glimmer of hope is that President Trump seemingly softened his position on threats to place more tariffs on China. While this issue continues to create uncertainty, investors appear to be willing to shift their focus to earnings season while the negotiations with China carry on.
For the elephant in the room, let’s briefly talk about the government shutdown. Now three weeks old, the shutdown is beginning to enter its next phase. Furloughed federal employees missed their paychecks on Wednesday. While the shutdown has already led to flight delays, national park closures, and IRS phone delays, it is the missing pay that is the real concern. Eventually, this will affect consumption and spending, which will influence the economy. Unfortunately, neither party seems willing to bend just yet.
Now for the good news. Earnings season kicked off this week with many of the largest banks reporting. As you know, bank lending is a cornerstone of the economy and gives us a glimpse into the health of the economy. Fortunately, according to JPMorgan, Goldman Sachs, Bank of America, Wells Fargo, and Citigroup, the economy is firing on all cylinders. Dealmaking, trading, and corporate lending all surged in Q3. JPMorgan took in $8.98 billion in the third quarter on trading revenue, which is a record for the company. However, some concerns were noted, particularly with private credit.
For the not-so-great news, private credit could be headed for choppier waters. In the aftermath of the financial crisis of 2008, additional regulations were placed on the largest banks to prevent similar events from happening again. In the wake of these regulations, what sprang up is now being called the “shadow banking system.” These are non-bank financial intermediaries that perform traditional banking functions, such as lending, outside of the regulated banking system. This week we learned that there are cracks appearing.
First Brands, a midsize maker of automotive parts, filed for bankruptcy last month with recent allegations that fraud was committed including pledging the same collateral repeatedly. The company has $11.6 billion in liabilities. Tricolor, a subprime auto lender, filed for bankruptcy in September leaving companies like JPMorgan and Fifth Third Bank with hundreds of millions in losses. Their liabilities are also between $1 and $10 billion. You know how they say history doesn’t repeat itself, but it rhymes? 2008 was a crisis of subprime mortgages. 2026 may be a problem of subprime auto loans and shadow banking. The private credit market tops $3 trillion and could expose the system to second derivative effects. As JPMorgan’s CEO, Jamie Dimon, succinctly stated this week, “When you see one cockroach, there are probably more.”
For the story of the week, I turn to Smucker’s and its renowned Uncrustables sandwich. This week the company sued Trader Joe’s for allegedly copying this delectable treat. Apparently, they went one step too far, with a circular sandwich and marketing of said sandwich with a bite taken out. Companies like Walmart, Aldi, and Target have similar food items but in square-shaped and without the bite. Clearly, they must be different. Regardless, Smucker’s wants Trader Joe’s to destroy its frozen, crustless, PB&J delicacy, and hand over any money it made from them since launching this summer. Now you know.
Bruce J. Mason, MBA
